If anyone can "explain" it, they should go get filthy rich. But we can speculate in a semi-educated way. I think my best speculation is that the economy's fall factored in uncertainty about how bad this really is. The sell-off was based on worst case scenarios (given such high uncertainty).
Now that uncertainty is going down as we understand it all better, have more data, have plans in place, the economy is recovering to a more accurate, "this is actually what this whole ordeal will cost us"
You're missing the most important factor - the trillions of dollars being injected into the market, and into various companies by the Fed, with no due diligence as to whether or not they will be spent well.
When there's so much stupid money being pumped into the system, why would the fundamentals, like unemployment, lack of consumer demand, gdp contraction, expected dividends, etc, etc, matter?
We could all be out of work, trading bottlecaps for packets of ramen for the next year, but as long as the fed keeps printing a million dollars for every 3 unemployment claims, the markets will be soaring.
(I should point out that because the USD is a world reserve currency, and has very large amounts of it in circulation, this won't even result in hyperinflation.)
Spot price does nothing to measure uncertainty. Volatility is still very high which means, by definition, we are in an uncertain market.
A much better explanation for the dow rising is the opposite of what you propose: we don't really know how this will impact things so it's very hard to price all of this in. Investors already known that unemployment claims this week would be awful so that information is already priced in, but we're still really waiting on information about how all of these impacts will impact businesses as a whole.
Maybe. Personally, I think the median investor, especially the median short term investor, tends to be more optimistic than the rational market hypothesis would argue. Information availability isn't symmetric, and the news sources favored by these people tend to paint rosier pictures of the recovery than seem likely.
I mean, one very straightforward interpretation of the headline of this linked article is that Yelp will be seeing a 30-40% shortfall in revenue for the medium term future (i.e. long enough to make the firing and hiring process worthwhile). At its worst, the market was guessing at a 38% drop in valuation, and it's now recovered significantly from that.
My guess, and no I'm not buying puts to test it, is that we're going to see another series of shocks to the market when the revenue numbers start being reported and the big employers start running out of money and shutting things down.
Right now the immediate job losses are all in the service sector and small employers, and those jobs are basically invisible to your typical trader bro.
I agree. For example, we have just started to see only some of the second-order effects, as a huge number of people missed their April rent payments, and mortgage default rates started to shoot upwards. Consumer spending is similarly tanking; people can't buy the newest iPhones when they don't have jobs.
I think Q1 numbers will start to shake people out of their optimism. We'll see.
> Right now the immediate job losses are all in the service sector and small employers, and those jobs are basically invisible to your typical trader bro.
Most of this activity is driven by robotic trades by institutional investors. It's largely quantitative. Whether the quantitative priors are accurate, is debatable.
I don't buy that. Objective quantitative analysis based on models that don't know about the pandemic should be pricing in a disastrous 30% unemployment, and clearly the market is not.
I'm not in the industry, but I have to believe the quants are doing what all of us are: they're throwing out the models, rewriting stuff where possible, but basically just guessing like the rest of us. And that process is a victim of their own subjectivity. And this is not just a demographic well-positioned to have a good, objective understanding of epidemiology.
Basically that's just a long winded way to say: wall street isn't looking at this correctly and is going to be surprised when quarterly results don't show the recovery they're expecting.
> Objective quantitative analysis based on models that don't know about the pandemic should be pricing in a disastrous 30% unemployment, and clearly the market is not.
That's not necessarily true. First of all, 30% unemployment, while a big scary unprecedented number, represents the expected outcome of the official policy of all governments (Federal & State) , which is forced unemployment. The CARES stimulus includes a $600/week unemployment insurance _on top of_ the existing state UI. In every state, the unemployment benefit is actually higher than the median wage [1]. Businesses know this, and proactively lay off / furlough their employees so that they may collect this benefit, with the intention of having them be first-in-line for re-hiring once this all passes. The other half of the CARES stimulus includes forgivable loans to businesses with the hope that those loans can keep businesses afloat so that they may be in a position to re-hire once this all passes. Put simply, because half the stimulus is in the form of direct insurance payments to people, and unemployment is the means of receiving that, you will see high unemployment numbers. Not only is this expected, it is intended.
All this being said, it's still not certain that many of these businesses will be able to survive even with the loans/stimulus, nobody knows for sure. The market doesn't price in the scary 30% unemployment number, it prices in the expectation that this number will fall back to usual levels by next year.
The grandparent comment asked why the Dow increased today, and it's because the Fed announced $2.3T in new small-business loans, which slightly increases the percentage of businesses that may be able to weather this storm.
>> I think my best speculation is that the economy's fall factored in uncertainty about how bad this really is.
I don't think anyone really understands how bad things are, and the only reason fears have abated is because everyone is operating under the assumption that the country will "open back up" later this month or next month, and things will largely go back to normal in the summer. Once that sentiment erodes and reality sinks in, we can expect the stock market to sink with it.
It happens all the time during sell out (1929, 2008). At some point shorts close their positions en masse. It doesn't stop the market from falling further later...
My guess: because speculators are speculating that the recent severe dips in the stock market are undervaluing the economy and therefore are buying when it goes low, propping up the price. Speculators speculate that the pandemic has not actually destroyed any significant real value in the economy and will bounce back, therefore the stock dips are overreactions and are good buying opportunities.
1) pricing in the return of US manufacturing. In a pandemic, it's every country for themselves. We've outsourced items critical for national sovereignty and the ability to respond to crises. I think left and right agrees now, that's a risk which needs to be mitigated.
2) govt has unprecedented support, in terms of small business loans and benefits
3) bonds and stocks are usually inversely correlated, they are not because the fed is buying up a significant portion of the debt, at low rates. Meaning your not getting much return if you hold bonds.
4) Capital flight from foreign markets. If you can't trust China, and emerging markets are going to get hit worse, then the US is where you want your money.
5) Less uncertainty.
6) More speculation that this virus is not as bad as we think. We're well below the expected deaths on the models, which means the models are wrong, by a factor of multiples.
Probably because this crisis will consolidate corporate power in the hands of big business.
The divide between big and small business in this scenario is stark. For companies that have access to bond markets and the stock market massive amounts of cash are being deployed to prop things up.
Small businesses are in complete free fall, with a non-functional short term confusing payroll assistance loan plan that has yet to lend to anyone in effect.
The writing is very clearly on the wall. Hundreds of thousands of small businesses will fail, and that will further tip market share towards larger companies, conglomerates, chains, and similar.
When you invest in the stock market you are investing in those larger businesses.
Along with the cynical, pessimistic, and snarky answers, bear in mind the market does not reflect what is happening now. It reflects an averaged, time-value-of-money-weighted assessment of what the market participants think it's going to happen in the future.
So, despite what you may naturally think, the market crash wasn't reflecting the fact many people aren't working right now, it was reflecting the fear that we could be knocked out for months. Now fears about the worst-case scenario are receding, so the time-averaged result rises as the result of the worst bottom elements lifting, even if the overall assessment is still problematic.
The FED announced a huge new stimulus package (as did the Bank of England earlier today).
I'm also surprised because I'd expect stocks to tank because that's what would make economic sense to me. People at home, not spending money, unemployment soaring. So far I'd assume this situation has more of an impact on the actual economy than the financial crisis but the market seems to disagree.
I guess the lesson here is that FED meddling/cheap money trumps all other factors. But that would mean eventually things should crash really fast.
The best lesson from "The Alchemy of Finance" (my favorite investment book) is that the market just represents the current bias, not the true situation but eventually converges to the true situation. That's subtle but hard to grasp. At least it was for me. Or in other words...what makes economic sense isn't necessarily reflected in the current market prices (as the efficient market hypothesis would suggest).
1.) The gov has shown they aren't willing to let the market tank.
2.) Many businesses are actually thriving right now via online orders. This means every part of their associated supply chains are thriving as well.
3.) This is a temporary revenue setback but will make it socially acceptable to layoff employees by the thousands...which will trim payrolls without losing an equivalent amount of production.
4.) Non-retired people wouldn't dare touch their 401k before they are 59 1/2, which are primarily comprised of stocks.
5.) The market is predicting a surge of activity once this is all over.
6.) This situation shook out any major bubbles that were forming (e.g. stock buybacks), and made the market more anti-fragile.
7.) People now see the value of having more goods on hand in their homes, which will probably mean increased initial spending when this is over.
Because the market is not pricing this as a signal that the "sum of all future free cash flow" is in jeopardy.
Governments all over the world have implemented financial relief to these companies by promising to shoulder the cost of wages through the normal unemployment benefit system. Companies taking advantage of that during this extraordinary period doesn't say much about what their profitability will look like after the lockdowns are over.
In fact, in some cases this could be evidence of a flexible company that is able to scale down quickly and is more likely to survive this and future demand shocks.
Birx continued, "is how important behavioral change is, and how amazing Americans are at adapting to and following through on these behavioral changes."
"That's what's changing the rate of new cases, and that's what will change the rate of mortality going forward," she said.
I can't find anything concrete there, but "already took into account" is a bit weaselly.
There had to be tons of uncertainty in a) how well people comply with the guidelines and b) how effective that compliance is. It certainly doesn't seem crazy to me more data would lead to revised values for those factors.
They could be more effective than originally expected. It could also just narrow the prediction interval--I'd bet that a lot of the "millions dead" stuff is reporting the high end, rather than the most likely outcome.
Yes, it seems it could either be "measures are more effective than thought" or "disease is not as severe as thought", or both.
Fwiw Michael Burry, someone who has earned the right to be listened to in the face of collective thinking, is strongly arguing for the "disease is not as severe as thought".
He makes the point that a) the new model has some optimistic assumptions, like no interstate travel and b) due to the exponential growth, a small uncertainty in R0 leads to wildly variable outcomes.
I guess I am uneasy with the "disease is not as severe" hypothesis because it's essentially unknowable. There's no objective measure of severity: it depends on knowing how to treat/prevent the disease and whether the necessary resources are available to do so.
While it varies with health care rationing, think CFR is still a useful measure of disease severity and allows us to situate COVID vs. the flu. Knowing the real CFR depends right now on how we calculate the denominator. Burry had analysis that 4% of the undiagnosed asymptomatic Danish population had COVID-19 per blood donation data, which suggests the CFR is 80x less severe than official figures in Denmark.
Anecdotally the disease entered countries weeks, arguably months before any cases were officially announced, making it likely that the denominator is an order of magnitude greater than official stats, and thus CFR an order of mag less severe.
FWIW, she said "almost perfectly" and "up to 200,000 deaths."
The revised model predicts up to ~127k deaths, which is certainly less, but not egregiously so (here: https://covid19.healthdata.org/united-states-of-america )
If you kept the model exactly the same, you'd nevertheless get tighter and tighter estimates (i.e., reduced uncertainty and a lower upper bound) as more data comes in. This is just how statistics works.
Moreover, we're presumably learning stuff as we go (e.g., putting patients prone seems to work better than on their backs), so the survival rate itself is (hopefully) not stationary.
Has anyone seriously suggested that the US’s measures are being carried out anywhere near “almost perfectly”? Quite the opposite, there’s been lots of concerns voiced that people aren’t taking this seriously.
> The revised model predicts up to ~127k deaths, which is certainly less, but not egregiously so
1) Are the policy implications of potentially killing off all of (say) Salt Lake City much different from destroying New Haven? I would argue no, not really.
2) Biological data is often a nightmare to work with. Estimates about behavior too. Getting something within an order of magnitude is often not too shabby.
3) Errors ('up to') are sensitive.
Here's a toy example. Suppose you think two numbers are each around 5, but the data are consistent with anywhere between 0-10. The sum of these numbers must be between 0-20 (low case: 0 + 0 = 0, high: 10 + 10 = 20), and their product between 0-100 (0 x 0 = 0; 10 x 10 = 100).
More data comes in and you can estimate each value more precisely: now you know they're somewhere between 4-6. You know the sum is actually between 8-12, and the product between 16-36. That's a massive decrease in the upper bound (64 percent for the product!) but literally nothing has changed except for the increased precision.
The COVID models have exactly this problem--none of the parameters are known exactly--and the outcome is some function of combining them. Moreoever, we're learning more about what factors matter AND how to fight the virus.
Any decent statistical model like this should include a confidence interval , if biological is so difficult then the CI would have reflected that . This just seems poor science to me
The 200k/127k people are harping about IS THE CONFIDENCE INTERVAL (well, the upper half of it, hence "up to").
That's half of my point--you'd expect the confidence interval to narrow with more data, regardless of what's going on. On top of that, you've got model error and non-stationarity (e.g., better care is discovered, driving the mortality rate down), which can't be reflected in the confidence interval.
Company announces bad news and then the stock price goes UP. WTF?
This often seems counter-intuitive but is pretty simple to understand if you keep in mind that markets are always forward looking. For instance, if Company A typically makes $1m in profits each year, you can ascribe a value to it. However, if at some point, you suspect that their profit is going to drop 80%, you are going to devalue their stock accordingly. However, if the company announces that their profit "only" dropped by 60%, you have likely undervalued them (since you thought it would be worse) and it makes sense for you to increase their price.
So to get back to your initial question, the answer is the market thinks, right now, that things will not be as bad as they initially assessed.
I think most of the time stock prices go up when layoffs are announced. If a company releases bad news about the business and simultaneously lays people off, that's a different story. But layoffs are seen as cost-cutting, and an indication that the company will be more profitable (or at least lose less money) in the future.
Maybe you missed the ~40% drop it sustained in about a month's time? That happened when it looked like the world was ending and 2 million people were supposed to die in the US. Now that things are looking better, the stock market is improving.
The market is reactive to relatively short-term inputs. I'm looking at a few things that are causing the jump:
- Some of it is inflationary as others have pointed out. There's a lot of money entering the system right now, and markets tend to go up on that
- Some of it is short sellers realizing gains from the last month and exiting their trades (the effect of closing a short causes markets to rise)
- Some of it is psychological reactions to dropping death estimates, and concurrent optimism that things will go back to "normal" soon (or at least sooner than previously thought)
What the market did 12/21/18 is sort of irrelevant
Because of business loans and tax breaks it looks like companies will come out of this profitable and the government will pay for the workers during this period.
In times of great uncertainty or upheaval, markets fluctuate up and down pretty wildly.
Everybody realizes it should adjust to some new value to reflect the new reality. But nobody knows what that value is. So nobody is sure if the market has adjusted too far or not enough.
So any time any new information comes in, people grasp at straws trying to make sense of the situation (and/or decide they have to act despite very limited information), and the market goes up and down.
It doesn't just move smoothly in one direction and then gradually come to a stop once it finally reaches the new "correct"(-ish) value. It jerks back and forth as it gets there. So even when down is the inevitable direction, it's going to have a few ups mixed in.
It has been like this for days. Super weird, of course there are explanations, i am just not sure if they are correct.
So apparently the fed announced more financial measures. Which might cause some optimism. Also rumour has it there is a chance that the oil 'crisis' will be solved.
Also investors might be short sighted and think this will only take a few months. Who knows.
To me it feels totally incorrect, reading all the other news would mean stocks should go down. This crisis is a bit different though, it is not a financial crisis, which takes a while until it hits the real economy. I think nobody is entirely sure what is happening.
Every 10 years or so there is a 'catastrophic' event, so markets fluctuate, players are invited to get out, new players emerge and life goes on and on and on
Next one is around 2030 - see ya !
Constant revolutionising of production, uninterrupted disturbance of all social conditions, everlasting uncertainty and agitation distinguish the bourgeois epoch from all earlier ones. All fixed, fast-frozen relations, with their train of ancient and venerable prejudices and opinions, are swept away, all new-formed ones become antiquated before they can ossify. All that is solid melts into air, all that is holy is profaned, and man is at last compelled to face with sober senses his real conditions of life, and his relations with his kind.
Quarterly earnings coming out, better than expected numbers of covid-19 deaths compared to initial models, rumors that 2nd stimulus bill is to expand small business loans liquidity program.
Liquidity injections from central banks, federal governments, risks of the virus are starting to be known, stairs up & elevator down tends to lead to an over reaction, price discovery, oil cuts possibly happening today with OPEC, the FED announced +2T in purchasing of junk debt this morning, and there are going to be companies coming out of this much stronger than before.
This is the part that completely evades me. The economy ground to a halt worldwide, 6 million new unemployment claims are processed every week in the US, established startups are on life support, more and more small businesses are collapsing...
My guess is hope that we are almost through the worst of this and as yesterday Hopkins announced trial a possible treatment - people are also trying to get in while it is low
my guess is that people that are well off (rich) still have their income stream. A lot of tech workers, CEOs, etc are working from home. It's poor (or middle class) people (working in retail, tourism, food) that are disproportionately affected by this. In 2008, it hit rich people first, then "trickled down". So, the rich are seeing this as an opportunity to offload some extra cash onto the discounted markets.
Totally out of my field here, but is it possible the stock market doesn’t actually track the economy anymore? Stocks don’t pay dividends that often nowadays; it doesn’t seem to be so much an investment as a guess about where other people think the price is going to go. I mean, what does Bitcoin track, or the price of art? It almost seems arbitrary.
Since big companies can raise capital with really low interest rates... isn't the stock market basically a big Casino game? Name of the game is to guess what everybody else is gonna do and come out ahead. Most are just investing for a return. Seems pointless.
"Anymore"... It never really did. The two are correlated somewhat, but there has always been a great variance within that correlation, and it is no different now.
> Can anyone explain why the dow jones is going up?
That's easy: the market is betting the "help" is another mass wealth transfer from the bottom half of the population to the top half of the population. This happened every time we had a crisis. Why would a rational investor thing it would be different this time?
The printing presses are printing trillions of dollars. Some of that is going out in what are essentially hand-outs (Which is fine), some of it is going out to buy equities (Which drives the prices up, and is absolutely disgusting), and some of it is going out in the form of loans to dead businesses which will have to be repaid (Which props up the market in the short term, but will turn the economy into a debt-servicing zombie over the next decade).
Trump is desperate to not let the markets drop as part of his legacy, and the fed is doing everything in their power to not let the markets drop... Regardless of the long-term consequences. This is, of course, purely a coincidence.
That's why you can have 16 million unemployed in two weeks, another two months of shutdown on the horizon, nobody buying anything, everyone sitting at home, landlords not getting paid, and yet have the market partying like it's 999.
Because Ackman made a 1.5 billion dollar bet on a fast recovery, meaning that he invested this money into the markets. The stock market is not a good indicator of economic stability, but rather an indicator of how the top 2% of wealth in America is doing.
The Federal Reserve is printing $90B per day (on average) in open-ended QE. This liquidity is used to take agency paper and treasuries off the hands of primary dealers and hedge funds. In turn, the managers of these organizations refuse to sit on cash, so they grab other assets. Some (large) percentage of these assets will be equities.
Anecdotally, retail investors also appear to be buying the dip in volume, though we need more recent fund flows data to see if reality reflects anecdotes.
